Governments Should Borrow More, Not Less: Summers

Governments that can borrow long-term at very low interest rates should be rushing to borrow more, not less, and use that money to strengthen their finances, says Larry Summers, former U.S. Treasury Secretary.

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U.S. National Economic Council Chairman Larry Summers

More borrowing should not cause anxiety about a nation’s creditworthiness as long as the proceeds of borrowing are used either to reduce future spending or raise future incomes, Summers wrote in an editorial in the Financial Times.

Most industrialized nations are now able to borrow at “remarkable” interest rates, Summer said. The yield on U.S. 10-year Treasurys fell to its lowest on record on Friday and the payout on Japanese government bonds plunged below 0.8 percent on Monday, the lowest since July 2003.

“These low rates even on long maturities mean that markets are offering the opportunity to lock in low long-term borrowing costs,” Summers said. “Any rational business leader would use a moment like this to term out its debt. Governments in the industrialized world should too.”

Summers, who as chief economic advisor to President Barack Obama, helped to engineer a $787 billion stimulus package immediately after Obama took office in January 2009. He also served in the U.S. Treasury Department from 1993 to 2001, becoming Treasury Secretary in 1999. He played a key role in the Clinton administration's effort to bail out Mexico and Russia from their currency crises in the 1990s.

Summer said in Monday’s editorial that governments that can borrow at such low rates should invest that money into projects that will give better returns than the cost of borrowing. It would be “amazing” if there were not many public investment projects with certain equivalent real returns well above zero, Summers wrote.

While many in the U.S. and Europe are arguing for further quantitative easing, he warned that extremely low interest rates could fuel various kinds of bubbles. Businesses that are unwilling to undertake investment at current low rates would be even more unwilling to do so if rates were reduced by another 25 or 50 basis points, he writes.

"It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate," he wrote.